Slowing Gains in Farmland

U.S. farmland values tied to global and political uncertainty

Farmland values continue to hit new record-highs in the best crop-growing regions of the country, exceeding $15,000 per acre or more in some instances. However, some analysts think lower commodity prices in 2012 could mark the end of the recent strong gains.

"We’ll see a pullback in the growth of farmland prices in 2012, and growth in prices will not be as strong as in 2011," says Ernie Goss, professor of economics at Creighton University. "I don’t think we’ll see farmland prices decline."

The U.S. dollar will likely continue to strengthen as Europe slides into recession, making U.S. commodities less competitive in world markets.

The blenders’ credit and import tariffs for ethanol have expired, which could have a negative impact on demand for corn.

Mike Duffy, an agricultural economist at Iowa State Univer-sity, says the momentum behind farmland values will take a few months to slow, but after that, price gains will be much more moderate, moving forward in the 4% to 5% range. He is not ruling out a drop in farmland values if the world economy substantially weakens or producer margins significantly tighten.

"In 2009, land values dropped 2%," Duffy adds. So a drop in values is not out of the question.
While markets for farmland are mostly local, the U.S. average price for cropland as of January 2011 increased 9.4% from January 2010, with the largest gains occurring in the Northern Plains (up 17.2%) and Corn Belt (up 16%), according to the most recent USDA data, which was released this past August.

Cropland values in the Northeast and Southeast actually declined 1.3% and 1.1%, respectively. This year’s gains have been even bigger in the Corn Belt.

For example, land values were up 25% in Iowa, Michigan, parts of Illinois, Indiana and Wisconsin, according to the Federal Reserve Bank of Chicago. USDA numbers for 2011 will be released in August and could show year-over-year growth of as much as 30% in some locations.

Gains of 15% to 30% are probably not sustainable, though. "Is it a bubble? If grain prices continue to move higher, it’s not," Goss says. "I don’t think we’ll see a bursting of a bubble, but some of the air will come out."

Farmland sales could already be slowing in some areas. "What we’ve seen in Minnesota is far fewer transactions than there used to be," says Steve Taff, a University of Minnesota economist specializing in land values. "We continue to see some really, really high-priced sales, but the bulk of prices are moving 5% higher," he notes.

Farmland Bubble? Instances of extreme price gains are not common or warranted. "People have a lot of cash. Some are getting enthusiastic, and there are only so many tractors you can buy," Taff says. "Anyone can rationalize the need to round out their operation, spread equipment or labor over more acres, but bankers who are savvy are saying we got burned 20 years ago, so we’ll support only 40% of the loan for land."

Only if farmland values collapse will the current high levels be recognized as a bubble, Taff says. The last time farmland values plunged was during the farm crisis of the 1980s, when agricultural operations were overleveraged and interest rates and inflation were climbing. In 1980, the prime rate broke 21%. While few analysts believe interest rates will return to historical records, and inflation is being held at bay by high unemployment and slow economic growth, a surge in interest rates could remove some of the froth from farmland prices.

Other factors that could impact farmland include growing talk of the potential elimination of direct payments, which equates to $20 to $25 more per acre annually, and emerging drought in the heart of the Corn Belt, Duffy says. If dry conditions continue to persist into the growing season, particularly in northwest Iowa, southern Minnesota and the Dakotas, land prices could suffer.

"It’s a great time to sell farmland. Cash-rents, which are averaging a hefty $250 per acre, are likely to soften," Goss says. "The long-run outlook for agriculture is very strong, but there could be bumps in 2012. Long-term, 4% to 6% increases in farmland prices are sustainable."